Friday, July 18, 2008

Staying Around for Sudden Stock Market Jumps

Yesterday I saw the biggest one-day jump in my portfolio value in some time. Days like this are comforting. These gains may drain away in the coming days, but right now it feels good to be fully invested.

By “fully invested” I mean that all the money I won’t need for at least 3 years is in the stock market. I only use cash and fixed-income investments for money I will need to spend in less than 3 years (including university costs for both of my sons).

Most commentators recommend holding a fraction of your long-term portfolio in bonds so that you won’t panic during market declines. However, market advances outnumber market declines, and I’m more likely to panic if I don’t take full advantage of market advances.

Of course, there are worse things than investing a quarter of your retirement funds in bonds. One such bad idea is market timing. There are plenty of people who have pulled their money out of the stock market and are waiting for the right time to get back in. All these people missed out on yesterday’s advance.

Of course, missing one good day of rising prices isn’t the end of the world. But, eventually we will have a sustained period of rising stock prices and most market timers will miss out.

So, for others like me who remain fully invested, enjoy days like yesterday. There will be more of them in the future.

2 comments:

  1. Actually, missing the "best days" by not being fully invested can have a significant impact on your portfolio. If you google something along the lines of "missed best days in market", you can see studies of various indicies that show how staggering the reduction in returns can be just by missing 10 best days out of a decade for example.

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  2. Anonymous: I've read about such studies, but I can`t remember which books. A quick search turned up the following article that quotes a few studies: link

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